treasurehunt

I own both the stock and the warrants, but I think the stock is a better deal right now unless you are very bullish on WFC's business over the next seven years. The warrants only adjust downward for dividend payments that exceed $1.36 per year. Assuming that the dividend reaches this number by 2013, the stock will pay out about $9 of dividends till Oct 2018 that won't apply to the warrants. I calculate that for the warrants to beat the stock, WFC has to be close to $60 by Oct 2018. Adding in the $9 of dividends, this works out to a return of 15% per year. The warrants are a better deal if WFC stock returns better than 15% per year. Why not play it safe and just buy the stock? I am ignoring the possibility of the warrants spiking up in the interim for one reason or another.

Interesting! The press release says that you can email questions for Brian Moynihan to askbrian@fairholmefunds.com. Any takers here? I emailed the following questions, for what it's worth. 1) Consider an adverse economic scenario with GDP dipping by 3%, home prices declining by a further 20% and unemployment rising to 10.5%, all by the end of next year. What will be the impact on BofA's capital levels in this case? What levers does BofA have that can be pulled to keep capital levels up while minimizing the issuance of equity? 2) Some commentators, including Joe Stiglitz just today, have been clamoring for (i) even higher capital levels than dictated by Basel III and (ii) faster phasing in of higher capital levels than the current schedule. Do you see any evidence of regulators agreeing with this viewpoint? Will BofA have to issue stock if it has to reach a 9.5% capital ratio by, say, 2016 rather than 2019? 3) It appears that most of BofA's mortgage losses, and legal issues related to securitizations and foreclosures are due to vintages from 2005 through mid-2008. How far along is BofA in terms of digesting the loans and securitizations from this period?

According to Morgan Housel of the Motley Fool, Charlie Munger had this to say on the debt ceiling: "This raises the question of why the U.S. even has a debt ceiling. No other major nation has one. The popular argument is that a debt ceiling prevents the Treasury from engaging in out-of-control spending. But this is short on logic: The Treasury doesn't spend money. It simply pays the bills Congress racks up. If overspending is the issue, that's what Congress should be debating -- not whether it should tie the hands of the bank that pays for its spending." Sounds like Munger feels the same way that Buffett does about the debt ceiling. Here's the original article: http://www.fool.com/investing/general/2011/05/10/charlie-munger-on-berkshires-future-taxes-and-the-.aspx

Why would you include the value of BNSF's debt in a calculation of BRK's equity value? Would BRK be worth even more if BNSF had 50 billion of debt rather than 10 billion?

This seems optimistic to me. BYD's auto sales are down year over year so far in 2011. According to this article from Reuters, sales are down 27.5% through March: http://www.reuters.com/article/2011/04/07/china-auto-idUSL3E7F70A220110407. Margin reversion to 8% is also a stretch, I think. BYD cut prices on several models in February: http://www.cnbc.com/id/41656075/China_s_BYD_Says_Cuts_Car_Prices_by_Up_to_19. I'll be happy if the margin stays at 5% this year without falling further. :) I do own some BYD, but that is basically a speculative bet that they will be a big player in the future in electric batteries or solar energy.

Twelve companies altogether. Top four account for 78% of my portfolio.

No, the amounts you mention are notional amounts at a certain reference price. As of the most recent S&P and RUS2k pricing, these hedges are effectively short ~$6.1B in equity value [edit: about half a billion here is individual name shorts, but I just lumped them in with the indices to capture the raw value in some way]. This is ~75-80% Russell 2k, so the math for you would be: ~$4.6B and $1.5B in new effective value (remember, as with shorting, the Total Return Swap size effectively increases as the bet goes against you). Ben, Thanks for clarifying. I misunderstood how the swaps work.

I only get a pre-tax loss of $129 million on the hedges (1.3 billion S&P and 3.3 billion Russell 2000, right?). After tax, this is only $4.5 per share or so. Also, it looks like the pre-tax gain on the stock portfolio is more than $129 million. ABH, DELL, LVLT, SD and WFC have all had gains of over $20 million. The only big loser I found was FTR. Net of hedges, the stock portfolio is at break-even or better so far this quarter, I believe.

A couple of interesting paragraphs from the report (they are towards the very end): While our primary objective is to expand our insurance and reinsurance operations worldwide, our investing skills could provide us with opportunities to buy, in whole or in part, excellent companies in other industries which generate strong free cash flows and will contribute to our objective of achieving a 15% per year increase in book value per share over the long term. For entrepreneurial founders who have built their companies over long periods of time, Fairfax will be an excellent owner, allowing the founders to continue to run their business, unfettered by the head office, and we are open to these opportunities. Sounds like Fairfax is following in the footsteps of Berkshire and Markel... Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future. I think buybacks are likely unless the insurance market hardens soon.

Good point about inflation. I have been looking at my assets lately, trying to see how they will do in an environment with high inflation. The conclusion -- my portfolio does not provide adequate protection against inflation. I have been considering buying real estate using a fixed rate loan as an inflation hedge. Another option is TIPS, but I am not sure if this is a good time to buy any US government bonds (what if yields go up for reasons other than inflation?). Any other suggestions? As for protecting myself against cataclysms like the eruption of Yellowstone, I don't see the point in spending a lot of effort on this. I am probably taking a bigger risk every time I drive my car. I prefer to accept that life is inherently risky and move on. Also, one comment on your dad's view of Indian real estate. His comments reflect a very common attitude in India. This view has been a good idea historically because inflation has generally been high in India. But what if India's inflation rate goes down as the economy modernizes? Then real estate as an inflation hedge looks much less appealing, and prices may come down significantly. Just as many people are ignoring the risk of high inflation in the US, I think folks buying Indian real estate are ignoring the risk of declining inflation in the future.

Thanks to everyone for this fascinating discussion. I am forty four and I am quitting my current job to take a break for a couple of years. I am not retiring as such, but the new occupation I have in mind for later -- teaching -- will pay much less. The points brought up in the posts on this thread have given me a lot to think about (but I am still not changing my mind about quitting :-)). Thanks especially to twacowcfa for the Arthur Miller book recommendation; I'll check this out. My net worth is about 30 times my annual expenses. I don't think this is quite enough for retirement, but it should provide a good enough cushion for lower income in the future. I think.

BNSF was actually a $34B deal, along with $10B of debt. Since $2.5B is what BNSF earned after interest payments on the debt, I think the appropriate comparison is $2.5B in earnings to $34B in cost. That doesn't look half-bad. But as you say, it will be a few years before we know how good a deal this was.

In defense of Willem Buiter, he joined Citi as chief economist in January 2010. Before that he used to write the maverecon blog at the Financial Times: http://blogs.ft.com/maverecon/. I have a vague recollection that Buiter was fairly early in recognizing the financial crisis, but I could be wrong. His blog used to be pretty good and worth reading.

I have a position in BYD, but I admit it's more speculation than investment. I share your concern about BYD turning out to be a great company, but not a great investment. Check out this recent interview with Wang Chuanfu, BYD's CEO: http://english.caing.com/2011-02-15/100225767.html. One thing that is clear from the interview is that all of BYD's new energy initiatives are very capital intensive, and BYD is planning to fund them at least in part with profits from their current operations. So the fact that their ICE car sales and profits have been much less than expected puts them in a bind. In order to go forward with their plans, BYD may have to issue more stock than they had planned on doing. Obviously this will not be good for current investors. Of course there is also the risk that BYD just won't succeed in its new initiatives as it anticipates. But if they come close to their grand goals, I have a hard time seeing how this will be a bad investment even with all the likely dilution.

Looks pretty ugly at first glance. Net loss of $364.6 million -- $18.43 per diluted share -- in Q4. Book value per share down to $379.46. Combined ratio of 105.8% for Q4 and 105.2% for the full year. The Q4 net loss was due to the equity hedges and mark-to-market losses on bonds.

A Gulfstream V business jet, perhaps? Or it could be a Pontiac G5, but that doesn't seem very egregious. :-)

What do you guys think of Michael Ashton's articles on inflation? He posts under the moniker "Inflation Trader" on seekingalpha. A couple of articles where he explains why the CPI is a good measure of inflation and dismisses shadowstats as not being credible: http://mikeashton.wordpress.com/2010/02/16/oh-yeah-canada/ https://mikeashton.wordpress.com/2010/06/17/another-reason-to-not-hate-cpi/ Another article on why inflation feels higher to most people than the official CPI measure: http://www.safehaven.com/article/17871/the-real-feel-inflation-rate Personally, I don't see any way the shadowstats inflation calculation can be correct. Looking at their charts, inflation has supposedly averaged better than 8% over the last fifteen years. This implies that a standard of living that required say $30K to support it in 1995 now requires $100K! That doesn't make sense to me at all.

Mine has to be buying Level 3 stock at several points in the last decade. I made a veritable lollapalooza of errors with this investment. 1) Investing in a company that had a good story but no history of profitability. 2) Ignoring the debt-laden capital structure. 3) Allowing myself to be seduced by a smart and very well-spoken CEO. "Silicon Economics" seemed like a great idea at the time. 4) Gaining comfort from investments in Level 3 by respected value investors like Southeastern, Prem Watsa etc. Hopefully I'll make different mistakes next time. :-)

Nothing is certain except death, taxes and complaints about the lack of a dividend on every single Berkshire board that's out there.

I agree with sdev. Why does FFH need a "catalyst" as long as Watsa is able to increase IV at a good rate and is willing and able to buy back stock? FFH certainly has enough capital to buy back stock if undervaluation persists, and hopefully IV will continue to increase. I must admit that I am bummed about the massive S&P 500 and Russell 2000 swaps that FFH put on when these two indices were much lower. By my calculation, FFH is in the hole by about $1.1 billion pre-tax on these swaps since inception. But I guess they make for decent disaster insurance. The swaps could constrain IV growth going forward though.

As cayale mentioned, American Express has a spend-centric business model, not a lend-centric one like the operations of most of their competitors. AMEX's capital ratios as of Q3 2010 looked like this: Tier 1 Capital: 11.7% Total Capital: 13.9% Leverage Ratio: 9.2% Tier 1 Common Risk-Based Capital: 11.7% Common Equity to Risk-Based Assets: 14.6% Tangible Common Equity to Risk-Based Assets: 11.5% AMEX only has about 57 billion in loans outstanding (this includes stuff they securitized but had to bring back on the books earlier this year). I think an 8% reserve requirement will have no impact on the way AMEX does business. Btw, despite maintaining the above capital ratios, AMEX had an ROE of 27% or so last quarter. Prior to the credit crisis, I believe AMEX was running with much lower capital ratios. They also had an ROE of 30%+. Management has already conceded that ROE will drop to the 25% range thanks to higher capital requirements. As for your futuristic scenario, I'll wait until I see some sign of at least one major country moving in this direction before worrying about it. I am more concerned about online payment options like Paypal than about the combo debit/credit/id card.

There is a more comprehensive list of changes at the Warren Buffett Watch page on cnbc: http://www.cnbc.com/id/40198762 Mostly a bunch of small sales and additions to WFC and JNJ. Buffett bought 16.32 million shares of WFC in Q3. According to the 10-Q, his cost basis in WFC went up by $462 million, implying that he paid about $28.31 per share. Hey, we can buy WFC for cheaper right now! :)

I agree -- ALTHOUGH YOU ARE THE ONE DOING THE STRETCHING PREM. Next time don't be so eager to criticize. Husman simply and accurately calculated -- (0.042%*14.7T) + (0.035%*14.7T) = $11.3B Basic stuff... He didn't do -- (0.042%+0.035%)*10%*10*14700 = 11.3...which you obviously completely made up as a result of your inability to follow his reasoning. And your assertion that (0.042%+0.035%)*10*14700 = 113 is completely irrelevant to the analysis and reasoning. Munger, Could you elaborate? Hussman's numbers still don't look right to me. Hussman says that a 1% increase in the S&P500 is followed by a .042% increase in GDP the next year and a .035% increase in GDP the year after that. Then he says that a 10% increase in the S&P500 works out to a temporary increment to GDP of 11.3 billion over two years. The math should be the following, right? (0.042%+0.035%)*10*14700 = 113 This is exactly what watsa_is_a_randian_hero is saying, I believe.

Irwin Michael's notes on ELF from 2002 to 2010 are available here: http://www.valueinvestigator.com/en/valuevault/elf.php Looks like ABC Funds sold out of ELF in March of this year. Irwin says "Although we believe that the worst is behind the Company, we were disappointed to see deterioration in the underwriting results at the Dominion of Canada General Insurance Company.". But it seems the main reason for the sale was something else: "In today’s market, we are looking for greater liquidity, something E-L Financial lacks. Because we are seeing more attractively valued opportunities with greater liquidity elsewhere, we divested our position.".

Book value per share up 7.6% since the beginning of the year to an all-time high of 90,823. Index puts lost 700 million pre-tax even though indices all went up (loss due to decline in the risk-free rate and the dollar's drop against other currencies). This means little, however. BNSF is chugging along nicely -- over 1.1 billion in pre-tax earnings this quarter. GEICO continues to kick butt with decent growth and a combined ratio of 92. Netjets was profitable again this quarter. Looks like Buffett bought another $460million or so of Wells Fargo. 31 billion in cash with more coming in thanks to the Swiss RE repayment and the impending Goldman repayment. Things look good with Berkshire...